Weekly Trading Update - August 31 - September 04 2009

Well thankfully it's been a much more profitable week this week after two winning trades on the EUR/GBP and GBP/USD pairs. There was also an opportunity to trade the EUR/USD pair as well this week but despite the daily Supertrend indicating a bullish trend, I'm reluctant to go long at the moment because I think this pair's heading lower in the next week or so. Plus there's been a lot of sideways action on this pair recently which is enough to put me off.

Anyway back to my trading results for this week and the first trade was on the GBP/USD pair on Tuesday afternoon. I had been waiting for this pair to break downwards and it do so convincingly during one 4-hour period. So as a result of the EMAs crossing downwards I entered on a pull-back at exactly 1.6250.

Thankfully the price continued downwards and I closed half the position for 50 points and let the other half run, moving my stop loss down to break-even. Later on the price had moved down to around 1.6125 so as it was getting late I moved my stop loss to 1.6150 and my target price to 1.6050 and let it run overnight. Sadly the stop loss was the one that got triggered but it was still a decent enough profit.

Incidentally the GBP/USD pair looks as if it may be about to cross downwards before the day is out, but I'm hoping it will hold on until next week because these crossovers often have much more momentum behind them at the start of the trading week.

The other trade was on the EUR/GBP pair and if you've been reading my blog this week you will know all about this trade already because I discussed it in some detail in this blog post. As I mentioned at the time this was a low-risk high-reward trade, and thankfully the 30 point stop loss wasn't triggered and I managed to bank a healthy profit of 74 points.

It has actually dropped another 40 points since then but I was so bored watching this pair that I closed out the position shortly after it hit my initial price target.

Nevertheless it's been a profitable enough week on the whole.

(If you would like to find out more about my main 4 hour trading strategy, you can access it for free when you subscribe to my newsletter. Simply fill in the short form above).

Why Do So Many Forex Traders End Up Losing Money?

A lot of people have jumped on the forex trading bandwagon in recent years. They've heard about how much money you can potentially make by trading the currency markets and have leapt head-first into this exciting industry.

However once they open an account and start trading, they soon realise how difficult it is. Indeed the vast majority of people will end up losing money. So where do they go wrong?

Well firstly they will often start trading without using a proven trading system, ie a system that has generated profits consistently on a long-term basis. The systems that they do use are often sub-standard ones they have bought on the internet or read about on the various forex forums.

They may even choose to use a forex robot if they don't fancy trading the markets themselves. However again while there are some profitable expert advisors, many of them will end up losing money in the long run.

The other major problem is most people new to forex trading do not have a firm grasp of money management, and more specifically how to manage risk. As a result they will often overexpose themselves when they enter a position which will eventually lead to them being completely wiped out in a lot of cases.

Well anyway if you yourself have trouble understanding risk management, then you may like to know that Bill Poulos has just released a new training video which covers this particular subject.

In this video he reveals the #1 reason why so many traders lose money and remedies this by providing you with the perfect risk/reward ratio that you can use as part of your trading plan. He also shows you how you can eliminate risk from every single trade you make.

You can watch this video by clicking here.

The EUR/GBP Pair - An Excellent Shorting Opportunity Above 0.88?

I've been watching the EUR/GBP pair very closely this week. Since dropping below 0.85 last month it's been steadily climbing upwards and in recent days it's been hovering just above the 0.88 level. However there are signs starting to emerge that this pair could be about to turn downwards.

If you look at the 4 hour chart for this pair and draw the Supertrend indicator you can see that although it's green, it has flattened out a lot, which is always a good indication that the bullish trend is running out of momentum.

Furthermore you can also see that the price has so far posted three recent highs of 0.8839, 0.8835 and 0.8833. Therefore it's clear that this pair is clearly struggling to breakout and post new highs.

This is why I personally believe that there is an excellent low-risk high-reward trading opportunity available on the EUR/GBP pair at the moment.

Indeed I opened a short position earlier this morning at 0.8820 and believe it could work out very nicely. I have placed my stop loss roughly 10 points above the highest high at 0.8850 in case the price does eventually break upwards, but I intend closing the position at somewhere between 0.87 and 0.8750 (I haven't decided yet).

The way I see it is that I'm perfectly prepared to risk a small 30 point loss in order to potentially make 70-120 points.

Let's see how it turns out.

(UPDATE: You could die of boredom watching this pair but thankfully I've finally managed to close this position at 0.8746 after it finally dipped below 0.8750. So this was a decent enough profit in the end).

Weekly Trading Update - 24-28 August 2009

Well it's been another frustrating week with a lot of sideways trading action but the summer months are coming to an end now so hopefully things will pick up in the next few months. There were just two trades this week using my main 4 hour trading strategy. They were both winners but I don't think I'll be ordering the yacht just yet.

The trades in question were on the GBP/USD and USD/JPY pairs. Both of these were in bearish trends on the daily chart (according to the Supertrend indicator) so I was only looking for shorting opportunities on the 4 hour charts.

The first trade occurred on Monday afternoon when the EMAs crossed decisively downwards on the GBP/USD pair. I went short at 1.6432 and ended up holding on to it overnight. My initial target price of 50 points was achieved the following morning and after closing out half the position I let the other half run, moving my stop loss down to break-even.

I had to go out on Tuesday afternoon so I set my target price at 1.6230 because I really believed a 200 point profit was easily achievable on this latest downwards move. However I was incredibly frustrated to come back and find that it had taken out my stop loss at break-even. Worst still the price did then go on to fall to this level (and indeed all the way to 1.6154). So it's fair to say that I was not amused.

The USD/JPY trade occurred on Tuesday morning after the EMAs crossed downwards. I went short at 94.27 but wasn't particularly confident about this one. Because I was going out I set both my stop loss and my target price at 40 points. Thankfully it did reach this target in the end but I was very close to being stopped out on two separate occasions.

So overall a steady but unspectacular week. By the way just like last week there has been an upwards EMA crossover on the EUR/USD pair but the decisive crossover candle was again too long for my liking.

If you would like to receive full details of my main 4 hour trading strategy, you can access it for free when you subscribe to my newsletter. Simply fill in the short form above.

Fibonacci Analysis and Forex Trading: A Match Made In Heaven

I've got something a little different for you today because the article below is a guest article from John Robinson (forextraders.com). It's a detailed article about fibonacci analysis and how you can incorporate it into your forex trading. I don't discuss this subject very often on this blog so hopefully you will find it useful.

---

Who knew that a mathematical theory developed sometime in the 13^th century would have so many applications today? Leonardo Fibonacci, the Italian mathematician for whom the Fibonacci theory is named lived between 1175 and 1250, but his theory lives on today. In fact, Fibonacci is one of the most often used technical analysis tools by traders of all asset classes, but its applications when it comes to forex analysis are especially useful.

Understanding the Fibonacci theory is easy. It states that each term in a sequence of numbers is the sum of the previous two numbers. (1,1, 2, 3, 5, 8 and so on.) The sequence isn't all that important to understanding Fibonacci for forex analysis, but the power of the so-called Golden Ratio is. The Golden Ratio is basically the quotient of the adjacent terms and that number is 1.618 or 0.618 as an inverse. How important is this number? Just type Fibonacci 1.618 into a search engine and watch how many results turn up that involve the practical application of this number.

But enough with that. How can Fibonacci be used to make a forex trading strategy more profitable? Used in forex analysis, Fibonacci's golden ratio is translated to three numbers 38.2%, 50%, and 61.8%. Five lines are drawn on a chart including these three numbers with 100% and zero percent. Obviously, 100% is the high and zero percent is the low.

The interesting thing about the Fibonacci levels on a forex chart is that they frequently act as places where prices start to rebound or as support and resistance levels. On a traditional five-line Fibonacci chart, a currency pair that has retreated from the 100% line is likely to find support at the 61.8% line. If the pair doesn't find support there, that is a signal for to sell it short. Knowing this, it's fair to say the Fibonacci theory is a useful tool for trend traders.

On the other hand, Fibonacci can also be a profitable tool for short term trading. If scalping is part of your forex trading strategy, then you should not be without Fibonacci charts on your trading platform. As we said above, Fibonacci levels often represent price areas where a forex pair starts to rebound, so using the example above of currency that has peeled back from the 100% Fibonacci line, it is likely to find support at the 61.8% line and start to move higher again. If you take a look at a long-term chart, say an hourly or daily, and draw Fibonacci lines, you're bound to see several examples of the Fibonacci lines acting as areas where a previous price trend started to reverse.

The point is that short-term traders are often getting thrown around by market movements because they don't properly identify the most important price levels in a given forex pair. Proper use of Fibonacci lines can help prevent this problem and put the odds in favor of the forex trader. And no, you won't need to draw the lines yourself by hand. Most charting packages come with a Fibonacci feature.

Smart forex traders know that trading against the trend is perilous to the health of their account and that their forex analysis regimen needs to include trend identification. Fibonacci is a superior tool for keeping a forex trading strategy on the right side of the trend.

Forex Volume is Down – What are the Implications?

According to a recent report by the Reserve Bank of Australia (RBA), forex volume is down in nearly every major category. “However, turnover declined by over 20 per cent between October 2008 and April 2009 to US$2.5 trillion, to be at its lowest level in over two years, a move reflected in all six markets indicating global, rather than location-specific, causes. The largest markets – the United Kingdom and the United States – experienced the sharpest percentage falls.”

The report was based on a survey of the world’s six largest forex trading hubs – US, UK, Japan, Canada, Singapore, and Australia – and produced a few interesting revelations. The first is that forex volume peaked well after other capital markets. This can probably be attributed to the notion that there is never a bear market in forex. In other words, after stocks and bonds began to collapse in the summer of 2008, investors embarked on a mission, unprecedented in its speed, to move capital from risky countries to safe-haven countries. This switch, by definition, required the forex markets to facilitate.

This point is further illustrated by the fact that, “the decline in turnover of spot and forwards occurred somewhat later than that in foreign exchange swaps and derivatives….Spot turnover reported in October 2008 was likely to have been supported by large cross-border capital flows as investors sought to reduce risk by repatriating foreign investments. In addition, the high frequency and impact of news at the height of the crisis would have generated the need for investors to frequently adjust their positions.”

The final revelation is that the change in forex volume was not always commensurate with changes in trade volume. A general relationship between trade and forex turnover has been observed, although speculators ensure that currency is exchanged much more frequently than actual goods and services. The two currency pairs registering the greatest unbalance are the CHF/USD and CAD/USD. Forex volume for the former fell much more sharply than trade, while the opposite is true of the latter. One can only speculate as to why this is the case. As for the CHF/USD, forex volume probably suffered disproportionately more because both the Swiss Franc and US Dollar were perceived as safe haven currencies, in which case it would be relatively less useful to exchange them for each other. In the case of the CAD/USD, meanwhile, it makes sense to view the imbalance in terms of the spectacular decline in trade, which was largely a product of declining commodity prices.

It’s impossible to predict whether forex volume will remain depressed. Given the efforts underway to increase regulation and curtail leverage, I don’t personally expect volume to recover for a while. As for the implications, the less might be to stick to the majors. If volume is declining, it will probably affect emerging market currencies most. Lower liquidity might translate into higher volatility. However, it’s worth pointing out that volatility has been declining ever since it skyrocketed after the collapse of Lehman Brothers last fall. In that case, it might be that investors are behaving more prudently with less funds to trade with.

Forex Markets Indifferent to Bernanke Nomination

Earlier this week, President Obama officially nominated Ben Bernanke to a second four-year term as Chairman of the Federal Reserve Bank’s Board of Governors. The reaction was relatively muted, perhaps because most pundits had already anticipated the news. Bernanke himself probably sealed his own re-appointment with the public relations campaign he embarked on last month, ostensibly to offer a rationale for his response to the credit crisis. “In a profound departure from the central bank’s tradition as an aloof and secretive temple of economic policy, Mr. Bernanke has plunged into the public spotlight to an extent that none of his predecessors would have contemplated.”

Most of the sound-byte reactions came from politicians, and focused on whether he deserved another term, rather than the potential ramifications of his re-nomination. Heavyweights Barney Frank and Christopher Dodd both offered tepid support. Ron Paul referred to the news as irrelevant. Meanwhile, “European Central Bank President Jean-Claude Trichet on Tuesday said he was ‘extremely pleased’ by President Barack Obama’s decision.”

The reactions from investors, likewise, ranged from ambivalent to moderately supportive. Equity markets rose to a 2009 high the day after the story broke, while the Dollar fell slightly. The re-appointment was deliberately awarded five months ahead of schedule in order to help the president’s credibility with investors. Fortunately (or unfortunately, depending on how you look it), the fact that the markets didn’t react much, shows that they don’t really care. In other words, “President Obama overstated matters when he said that Mr. Bernanke had kept us out of a Great Depression” not only because “this remains to be seen,” but also because the ebbs and flows of GDP are contingent on more than just monetary policy.

Regardless of how much credit Bernanke actually deserves, he will certainly have his work cut out for him in his second term. “Bernanke’s Next Tasks Will Be Undoing His First,” encapsulated one headline. At some point, the Fed must raise interest rates, return credit markets to normal functioning, and remove hundreds of billion of dollars from the money supply.

But this is easier said than done: “If the Fed shifts too quickly from the role of savior to that of strict disciplinarian, it risks aborting the recovery and tipping the nation back into a recession, essentially repeating mistakes made in 1937 after the economy had begun to rebound. If the Fed moves too slowly, it risks the kind of intractable inflation it experienced in the 1970s and fueling another bubble.”

The consensus is that, for better or worse, he will err on the side of price stability, perhaps at the expense of economic growth. “A Fed chaired by Ben Bernanke will follow a policy uncomfortably tight as the 2012 election looms into sight. Bernanke has espoused a commitment to low inflation over his entire career,” argued one economist. Meanwhile, the markets aren’t expecting rate hikes at least until 2010, although Bernanke, himself, has conveyed a sense of optimism – and hence hawkishness – about a quick exit from recession.

What does all of this mean for the Dollar? It’s impossible to say exactly, and depends largely on whether Bernanke can unwind the easy money policy of the last year just as deftly as he deployed it.And of course, there is the wild card of the US National debt, and the potential for a loss of confidence to induce a run on the Dollar, which even Bernanke would be powerless to solve.